Bloomberg News

S&P Cuts Italy Two Levels on Rise in Costs of Financing Debt

January 16, 2012

(See EXT4 <GO> for more on the European debt crisis.)

Jan. 14 (Bloomberg) -- Italy’s credit rating was cut two levels by Standard & Poor’s, which said the inability of European leaders to contain the region’s debt crisis would complicate the country’s efforts to finance the area’s second- biggest debt.

S&P cut Italy to BBB+ from an A rating, the second downgrade by the rating company since September 19, according to an e-mailed statement yesterday. S&P, which cut eight other euro-region nations including top rated France and Austria, left its outlook on Italy negative.

“Italy’s ratings reflects our view that the country’s external financing costs have risen markedly and may remain elevated for an extended period of time amid a reduction in cross-border financing of Italian banks and the government,” the New York-based rating company said.

“We expect that a difficult external financing environment will have negative implications for growth performance and hence public finances.”

S&P had put 15 euro nations, including Italy, on review for a downgrade on Dec. 5, linking its final decision to the outcome of an EU summit that ended on Dec. 9. EU leaders, in their fifth attempt to come up with a comprehensive solution to end the two- year old debt crisis, agreed to forge a tighter fiscal union, shore up bailout funds and tighten rules to curb future debts.

Summit ‘Insufficient’

The outcome of the summit was insufficient “to fully address the euro zone’s financial problems,” S&P said.

The decision increases pressure on Prime Minister Mario Monti to show he can implement a 30 billion-euro ($38 billion) plan passed by Parliament in December to cut Italy’s debt and spur economic growth. Concern about Italy’s ability to fund a 1.9 trillion-euro debt pushed its 10-year bond yield this month to more than the 7 percent threshold that prompted Greece, Ireland and Portugal to seek bailouts.

The yield on Italy’s 10-year bond rose 1 basis point to 6.64 percent, and down from 7.16 percent on Jan. 9. That widened the gap between Italian and German yields to 488 basis points.

While the European Central Bank loaned almost half a trillion euros for three years to euro-region banks in December to avert a credit crisis, the Frankfurt-based institution has resisted pressure from politicians to step up its purchases of government bonds of countries such as Italy and Spain.

Bond Auctions

The ECB lending helped shore up demand for Italian bonds and yields plunged this week at its first two auctions of the year. Italy sold 12 billion euros of bills on Jan. 12 and 4.75 billion euros of bonds yesterday. The Treasury paid 2.735 percent on its one-year bills, less than half the rate at the December sale.

The rating cut may stem the slide in Italy’s financing costs as the country braces for more than 50 billion euros of bond redemptions in the first quarter. The Treasury needs to sell 450 billion euros of bonds and bills this year to service its debt.

“Italy is being stripped of its membership of the ‘A’ club of developed market sovereigns,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in an e- mail report. “It remains one of the most vulnerable economies in the euro zone because of the huge amount of debt it needs to roll over this year and the threat of a severe recession exacerbated by fiscal austerity.”

Italy’s $2.3 trillion economy will contract between 0.4 percent and 0.5 percent this year, its fourth recession in a decade, and remain flat in 2013, Deputy Finance Minister Vittorio Grilli said on Dec. 4. Monti has pledged to present a new plan to spur Italian growth and competitiveness at a meeting of euro-area finance chiefs on Jan. 23.

Although Italy’s debt is larger than that of Greece, Spain, Portugal and Ireland combined, its 2010 budget deficit of 4.6 percent of gross domestic product last year is less than France’s and half that of the U.K.. Monti’s measures should help the government achieve its goal of balancing the budget in 2013.

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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